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Competition in the Legal Industry

I have written previously about the first two disruptors of the legal industry consumers and technology. Competition is the third major disruptor. Many smart people with a lot of money behind them are thinking about the law and how to muscle in on the action, as well as how to improve what has been a slow moving, slow changing profession. These are some of the companies out there that are legal service related.

One of the things I want to point out to you is if you look at the timeline of startups founded each year, there is not much activity prior to 2011. Then in 2011, it jumped up dramatically and has continued to increase.

In 2007, in the UK they passed the Legal Services Act (LSA), which went into effect in 2011. The LSA deregulated much of the long-standing legal services regulations in the UK, and replaced it with a new regulatory scheme. One of the most important points of deregulation is the equivalent of our Rule 5.4, which prohibits non-lawyers from participating in the financial life of a law firm. In the UK, non-lawyers can now invest in and own law firms. Law firms can be publicly traded. Australia went through deregulation a decade ago and there are Australian law firms that trade on the stock market. One of those, Slater Gordon, has a $2 billion market cap.

This change in the UK was a massive event in their legal system. People in the US are looking at what happened in the UK and Australia, as well as similar changes in Singapore, Canada, and other countries around the world that are considering liberalization of their legal systems. To many it has become obvious that the US legal system cannot escape these changes, so entrepreneurs have said, “let’s figure out how to get in on this.” This explains why we see the increase in legal startup funding in 2011. In 2012, $66 million was invested in the US in these legal startups. That number jumped to $458 million the next year and it is expected to be even higher this year.

To give you some idea of what is going on with some of these players; LegalZoom received $200 million in 2014 for a total of over $400 million invested in their company. Rocket Lawyer obtained over $50 million. Axiom has received $28 million. Modria was founded by two former E-Bay executives and is an online dispute resolution platform, which has raised $5 million. Shake is a startup that creates contracts that you can create, sign, and distribute from your mobile device. It has raised $3 million. Wevorce is a divorce company that is sort of like a collaborative process. They are a startup and have raised $2 million and have done over 100 divorces so far.

Now, even more interesting than all of that is that there are a lot of partnerships and collaborations going on. Recently, Sam’s Club collaborated with LegalZoom so that their members receive discounted products. In addition, if members want some kind of legal counsel along with LegalZoom’s products, which are packaged documents, it will hook them up with lawyers who will provide counsel at a discount. Intuit is a big non-law company that creates business software. They purchased a company called .docstoc, which is essentially like LegalZoom in that they have pre-packaged business related documents. Walmart in Toronto, Canada has collaborated with a law company called Axess in a few of their stores. This is essentially a mini law firm that sits inside the Walmart store. Right now, the kinds of services they are offering include estate planning, wills, and real estate services.

Legal services is a $300 billion a year industry. It is one of the biggest contributors to GDP and up to this point it has largely been closed to competition. Lawyers have had a monopoly essentially from the beginning of practice in this country until recently. The benefit of that has been that lawyers have only needed to compete with other lawyers. This, in my humble view, is not that hard to do. Some people are seeing the writing on the wall. When law firms start to compete with Fortune 500 companies, the stage has definitely been changed.